"in tips" in a week's time; or that a taxicab driver receives "in tips" in a period of an hour. It just doesn't seem right under these circumstances to place an employer in the position of accepting a statement of tips received from an employee and at the same time require the employer to accept such a declaration as gospel. Technical and administrative difficulty in the proposal contained in section 9 of H.R. 11865 is that there is no way to insure accuracy in reporting. The employer has no way of knowing whether the employee's report is real or phony. Additional work required by section 9 in making up payrolls would be astronomical. After completing the payroll and making the regular payments to employees, the employer would be required to wait for 10 days for any reports which the employees might make and then compute the social security tax on the tips reported. This would mean a complete extra payroll computation for every employee in the tip category. H.R. 11865 does not provide for withholding of income taxes based on tip income. However, H.R. 11865 now provides that tips are wages. Section 3403 of the Internal Revenue Code specifically makes the employer liable for withholding taxes on wages. Under this section, if an employer requires an accounting from an employee for tips these may become wages for all purposes and the employer is required to withhold on them or face liability for payment himself. Query: Does the language in H.R. 11865 indirectly require the withholding of income taxes based on tip income? Tip employees perform a personal service to patrons of hotels and motels and are compensated accordingly. We strongly believe that if a tax on tips is to be imposed for social security purposes, the most practical, beneficial, and least complicated way of handling the matter is to consider such tips as true self-employment income. This would avoid disputes between employer and employees; avoid disputes between unions and put the employees on their own to pay taxes and to receive benefits based on the taxes that they pay. There would be no difficulty in the computation of tax. The employer would pay his share of the social security tax on the employee's regular wages. Annually, the employee would declare his "tips" as self-employed income. The employee's tax on self-employment income for social security purposes would only apply to the extent that regular wages did not reach the base of $4,800 per year. It is obvious that a proposal which would permit such manipulation is a disservice to the welfare of a community and an unwarranted interference with sound business practices. The amount of tip income that an employee receives should be a matter between him and his Government. Nothing can be gained and only discord and confusion can follow by inserting a third party between the said employee and his Government. Gentlemen of the committee, you have always accorded the American Hotel & Motel Association's spokesman full and adequate hearings and we have been gratified by the interest you have manifested in our problems. We appreciate the opportunity to appear before you this morning and earnestly request that a detailed study be made on how best to handle the tax on tips for social security purposes before the proposal contained in H.R. 11865 is approved by Congress. We are cognizant of the thorough manner in which this committee considers tax legislation and feel certain that upon further consideration you will disapprove this potentially damaging piece of legislation. Thank you. The CHAIRMAN. Thank you very much, Mr. Packard. Senator CARLSON. Mr. Chairman, may I ask permission to insert in the record a letter that I have from the Kansas Hotel & Motel Association signed by C. H. Nanson, Jr., secretary, endorsing the position which has just been taken by Mr. Packard ? Mr. PACKARD. Thank you, Senator. (The letter referred to follows:) Senator FRANK CARLSON, KANSAS HOTEL & MOTEL ASSOCIATION, Senate Office Building, Washington, D.C. August 4, 1964. DEAR SENATOR CARLSON: As a member of the Senate Finance Committee you will be called upon very soon to review H.R. 11865, which relates to the taxing of tips that people give varies from State to State, city to city, day to day, meal law. As one can readily ascertain without much study, the great variation in the amount of tips received by employees in different localities, and the amount of tips that people gives varies from State to State, city to city, day to day, meal to meal, and trip to trip. How there can be any continuity, or any justification for the employer deducting for these tips is beyond our comprehension. It would appear that almost every employee would be in constant hot water with the Internal Revenue people, and it would be a very difficult job to adequately police such a matter. It would seem to me that perhaps the bill should be remodeled, and if tips are to be a part of social security, then there should be self-employment income. What I mean by this is if a bell boy or waitress or any individual who receives tips wish to consider it as self-employment income, he could report it, pay the tax, and get the benefit of it in his social security benefits. No doubt some employees would be happy to do this, and would appreciate the opportunity to do so. When you place a burden on the employers to determine tips, or to report on tips, then you are asking them to do something that is almost impossible. Won't you please use your influence to straighten out this matter? When the rules of Government become too oppressive that employers are constantly harassed by the Internal Revenue Service, and social security services, then you are creating a situation which breeds discontent, and eventually you will have almost a revolt on the payment of taxes. Just look what they are doing again by raising the limits to $5,400. This is strictly a revenueproducing situation when this is done and it doesn't seem quite right. We must be constantly on the alert. Kindest personal regards. Yours truly, H. C. NANSON, Jr., Secretary. The CHAIRMAN. The next witness is Mr. Leslie W. Scott of the National Restaurant Association. Senator DOUGLAS. Mr. Chairman, I would like to say the representatives of the National Restaurant Association are men of high character and well represent the progressive spirit in their industry. STATEMENT OF LESLIE W. SCOTT, CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE, NATIONAL RESTAURANT ASSOCIATION; ACCOMPANIED BY IRA H. NUNN, ATTORNEY Mr. SCOTT. Mr. Chairman, my name is Leslie W. Scott. I am president of the Fred Harvey Co., a corporation with headquarters in Chicago which operates restaurants in various cities across the country, at airports, on railroads, and in some of our national parks. I appear today on behalf of the National Restaurant Association of which I am a dírector, as well as chairman of its Government affairs committee. I am also representing the American Motor Hotel Association, a trade association affiliated with our National Restaurant Association; and Mr. S. Cooper Dawson, Jr., a past president and chairman of the Governmental Affairs Committee of the AMHA will file a separate statement for inclusion in the record. The National Restaurant Association is the trade association of the food service industry. Through direct membership and affiliation with 135 State and local restaurant associations, it represents over 100,000 restaurants in the United States. We have filed our statement with the committee, Mr. Chairman, and I will attempt to summarize it here in the interest of conserving your time. While the House Committee on Ways and Means held extensive public hearings on the subject of medical care for the aged it did not hold any public hearings on the contents of H.R. 11865. The legislation was brought to the floor of the House under a closed rule which prevented the offering of any amendments on the House floor. Neither the National Restaurant Association nor any other interested employer group were notified that a proposal to base social security covering tip income as well as wages would be considered as part of the proposed Social Security Act of 1964. Our first notice of this matter came only after the Ways and Means Committee had included section 9 in the bill. We were then told we would be permitted to suggest technical amendments but would not be permitted to direct our attention to the problem of including tips as wages for social security purposes because the subject was no longer at issue having already been approved by the committee. The potential harm of this legislation, in our opinion, is very great and if enacted it would create many new problems for restaurant operators and would serve to impair or destroy our good employer-employee relationships in an industry where even now almost half of the owners are reporting no taxable income. The National Restaurant Association is not opposed to social security protection for restaurant employees. It is not opposed to the principle of basing social security payments and benefits on the tip income of employees. It is not opposed to matching and withholding the employee's contributions providing a satisfactory solution can be discovered which would limit the employer's bookkeeping burden and would not be harmful to employee morale and would not adversely affect the already serious problem of recruiting employees. The National Restaurant Association is opposed to section 9 of H.R. 11865 because we believe it was conceived in haste, without adequate time being made available for interested groups to consider solutions and present them to both Houses of Congress. Section 9 is not a satisfactory solution to this problem. Therefore it should be removed and the matter of basing social security benefits and payments on tip income should be considered on its own merits, preferably at some time during the 89th Congress. Section 9 requires that all employees in any business or industry who receive more than $20 per month in tips report these tips to their employer within 10 days following the calendar month in which the tips were received. The employer must make a record of the tip income reported, withhold the social security contribution due thereon for any unpaid wages, match the employee's contribution, and provide the employee with a record of the amount reported and the contribution made to the Treasury. The employee is given the option of paying such money as may be due to meet the social security payment should sufficient wages for withholding not be available. The employer's liability for matching his employee's payment extends to all tip income reported by his employees even though the tip income may not have been acquired while in his employ. The nature of restaurant employment is such that all of our employees work in close contact with each other. They must cooperate and communicate continuously with each other if they are to do their jobs successfully, and this close contact causes these employees as a rule to be quite frank and they discuss with each other many personal problems. They know the wages being paid, and other things that might not be known to fellow employees in other industries. However, our employees do not know the tip income of their fellow employees, and the reason for this is that the tips are almost never discussed and they are certainly never disclosed. The employee's tip income arises from his very personal relationship with his customer or guest. He feels this makes tips his business and that of no one else. Often the families of tipped employees are not aware of the extent of the tipped income. Many employees feel that their employers would attempt to decrease wages if their true tips were known. Therefore, they feel their employer has an adverse interest in this matter. In certain union agreements, including some of those of our company, employers are even forbidden to question employees about their tips. Tips are never considered part of compensation in any agreement. It is certainly difficult to evaluate tips, and just recently in California, where my company operates, the industrial welfare commission of that State ruled that tips cannot be considered part of compensation. The question also must be raised as to who is the tipped employee. The Senate itself has tipped employees. The barbers in the various congressional barbershops are salaried employees who also receive tips. They are eligible for retirement based on their wages, but Congress has not seen fit to require them to report their tip income other than directly to the Internal Revenue Service. The employer never sees the tips his employees receive and, therefore, he has no knowledge of the amount of the tip income. There is thus no way of knowing the average or normal tip situation. Under the House-passed bill the employer must simply take on faith the employee's statement concerning his tip income. The employer is given no right to challenge the tip figure reported. Many employees might adjust their reported tip income to fit their personal needs and situations. The young employees, for example, who are not concerned with retirement and pensions might understate their tip income as a means of limiting their income tax liability. On the other hand, the older employee near retirement might overstate his tip income feeling that the added income tax liability would be worth the increased pension he would thereby obtain. Also, our industry employs many casual employees, particularly among the tipped employees. Many work for 10 or more restaurants in a month as they shift from weekend to weekend work or banquet work in establishments. The House-passed bill requires reporting within 10 days after the end of the month. It is possible for an employee to require the entire social security contribution for the month to be paid by the employer for whom he was working at the month's end or, for that matter, any one of the employers he might select during the month. Many service employees in our industry actually work to obtain supplementary income for specific purposes. Thus the primary sources of waitresses are housewives or high school or college students working part time or during holiday periods. They are not seeking social security coverage, but rather are working for specific purposes, quite frequently such as tuition for themselves or for their children. Tip splitting, also a part of our restaurant industry pattern, is a common practice and this results when busboys or bartenders are given a portion of the waiters' or waitresses' tips. Section 9 of this of H.R. 11865 is not clear as to whether employees who share tips would be covered by this bill. Another major problem is that many of our larger restaurants operations have introduced automated bookkeeping as a means of reducing costs. But the introduction of such a widely fluctuating daily variable as tip income into this machinery would force an extensive return to manual bookkeeping. The increased cost of doing so in my opinion might even outweigh the direct social security costs. This is a very complex subject, and I believe the problems are not adequately solved by the House-passed bill. Several industries are involved and many different types of employees. Not only would hotels and motels and restaurants be affected but also barbers and bootblacks and beauty shop operators, and beauticians and taxi drivers and others. The problems can be solved, and the defects corrected, but this cannot be achieved in the haste which has surrounded this legislation. This provision was rushed through the House and yet there was no need for haste for even under present law tips can be treated as income for social security purposes. Section 1329 of the Social Security Handbook published by the Department of Health, Education, and Welfare, makes this clear. At the present time banquet or club employees tips when charged as part of the bill are already used in determining wages for social security purposes, and all other restaurant employees may avail themselves of this under present law if they desire to do so. Actually under a more liberal interpretation of the Social Security Administration, a labor agreement in New York City has just been concluded between the Joint Council of the Hotel Trades and the New York Hotel Association where a combination of wages and tips |